Advisors are sometimes challenged when trying to address client questions around market forecasts and expectations. After all, who's to say one pundit's outlook is better than someone else's, considering virtually all prognosticators miss the mark more often than not?
A solution is to use the wisdom of the crowd.
Back at the turn of the millennium, the game show Who Wants to Be a Millionaire was the primetime program to watch. America tuned in to see if one lucky contestant could answer all 15 questions correctly and win the big prize. They were not on their own, though. Three lifelines were offered to each person in the "hot seat." The most popular lifeline was undoubtedly the "ask the audience" option, where the wisdom of the crowd was on display. The crowd was almost always right—at least the plurality of them. Of course, as the questions got tougher, the audience was less likely to pick the correct answer.
How can the trite Hollywood game show help advisors? Well, you can look at trading market indicators instead of pulling up the latest in-house or outsourced research piece about what inflation might be in the next decade or what the Federal Reserve will do at the next rate decision meeting. For example, advisors can find 10-year breakeven inflation data from the St. Louis Federal Reserve's database. What's more, the CME's FedWatch tool offers a glimpse into what the Fed Funds Target Rate is expected to be following each upcoming meeting.
The key thing about both examples is that the data is derived from financial markets — buyers and sellers coming together at an agreed-upon price. If one person thinks they have an edge, then they will wager on it with another trader. Thus, the collective knowledge of global market participants converges at a single level. While it will certainly change over time as new information comes out, price is the best indicator of what the future holds.
So, advisors — put away those lengthy research reports that are susceptible to human biases and cognitive errors. In this instance, trust the crowd.
You can learn more about economic indicators in the StockCharts.com catalog. You can also check out Tom Bowley's recent article featuring 3 inflation charts to follow.
